Franklin Electric Co., Inc. (FELE) Earnings

Management highlights

- Overall Quarterly Performance * Consolidated Q2 2026 sales hit $622.9 million, up 6% YoY with 3.5% organic growth; all three segments achieved positive growth. * GAAP EPS increased 11% YoY to $1.46, while adjusted diluted EPS hit a new quarterly record of $1.55, up 18% YoY, outpacing sales growth driven by margin expansion and SG&A productivity improvements. * Gross profit margin expanded 90 bps YoY to 37%, and adjusted operating income margin expanded 80 bps YoY to 15.8%. * The company closed three acquisitions in H1 2026 (two in water systems, one in distribution), all of which are tracking ahead of plan, strengthening positions in North American water treatment, European water systems, and extending the distribution segment's reach to new end markets. * Ending the quarter with strong order growth, a healthy backlog, and a balanced channel inventory position; the balance sheet remains strong, and operating cash flow improved significantly YoY in H1. * The company announced it will host its first ever Investor Day on March 23, 2027 in New York. - Strategic Progress * New product sales reached a record $10 million in Q2 2026, and new water treatment dealers added over $2 million in new revenue in the quarter, demonstrating progress on the company's growth-focused strategy. * A new Chief Supply Chain and Transformation Officer was appointed to lead the Value Acceleration Office (VAO), which is accelerating productivity improvement efforts globally. * A new factory in Turkey is being ramped up, and facility consolidations are ongoing in North America to build a more efficient long-term operating structure; 2026 capital budget is a company record, balanced between growth, productivity, and sustaining projects. * The company remains committed to consistent dividend growth for shareholders, and continues to invest in attracting, developing, and retaining top industry talent. - Water Segment Strategic Overview * The global water segment is a $1.3 billion annual business, a long-term core of Franklin Electric, and a global leader in products for water supply, movement, treatment, and dewatering with 15 factories worldwide. * The segment is positioned to benefit from powerful megatrends including rising middle class, residential construction growth, urbanization, growing demand for critical minerals, and expanding demand for liquid cooling solutions for AI and data center infrastructure.

Guidance

- Management raised full year 2026 guidance reflecting strong year-to-date performance and underlying demand resilience, while building in caution for ongoing macroeconomic and geopolitical uncertainty. - Full year 2026 sales guidance was raised to a range of $2.21 billion to $2.29 billion. - Full year 2026 adjusted diluted EPS guidance was raised to a range of $4.50 to $4.70. - Management expects productivity benefits from ongoing factory ramp-ups and facility consolidations to begin accruing in 2027.

Segment performance

1. **Global Water Systems**: Q2 2026 sales were $358.2 million, growing 5% year-over-year (YoY), accounting for 57.5% of total consolidated revenue. U.S. and Canada sales grew 8% YoY, led by 12% growth in agricultural groundwater pumping equipment, 11% growth in residential and water treatment products, and 6% growth in mineral extraction applications, offset by a 12% decline in large industrial dewatering equipment. International sales grew 1% YoY overall, with 5% positive impact from foreign currency translation and 1% from acquisitions, while organic volume and price declined 5% YoY; EMEA sales were negatively impacted by the ongoing Middle East conflict. Operating income was $65.2 million, up $3.4 million YoY, with an operating margin of 18.2% (down 10 bps YoY). Adjusted for $400k restructuring costs, adjusted operating income was $65.6 million (up 6% YoY), with an adjusted operating margin of 18.3% (up 10 bps YoY). 2. **Distribution**: Q2 2026 sales were $221.1 million, growing 11% YoY, accounting for 35.5% of total consolidated revenue. Growth was driven by higher volumes, acquisition-related sales, and price realization. Operating income was $19.7 million, up $3.6 million YoY, with an operating margin of 8.9% (up 80 bps YoY). 3. **Energy Systems**: Q2 2026 sales were $80.2 million, growing 3% YoY, accounting for 12.9% of total consolidated revenue. U.S. and Canada sales grew 1% YoY, while international sales grew 12% YoY led by growth in Europe and Africa. Operating income was $27.9 million, down $1.2 million YoY, dragged by a $4.5 million legal settlement provision booked in the segment. Adjusted for the legal provision, adjusted operating income was $32.4 million (up 11% YoY), with an adjusted operating margin of 40.4% (up 290 bps YoY).

Risks & headwinds

- Geopolitical conflict in the Middle East is negatively impacting sales volume in North Africa, Middle East, and Eastern Europe, and creates uncertainty for second half performance. - Macroeconomic weakness and political policy changes in South America (specifically Brazil) have led to slower-than-expected sales, creating uncertainty for the second half. - New tariff announcements create uncertainty for future input costs. - Ongoing material inflation partially offsets margin benefits from price increases and tariff refunds. - Soft regional demand in parts of Europe and South America remains a headwind.

Analyst Q&A

• Q: What is Franklin Electric's current exposure to high-growth critical minerals and data center markets, what CAGRs can be expected, and have there been any notable data center CDU wins?

  A: Critical minerals is a high-single-digit CAGR market, faster than Franklin's core low-to-mid single-digit underlying growth. The company's critical minerals business is focused on mine operation maintenance and dewatering, with limited exposure to capital cycle and commodity price volatility; sales grew roughly 10% in Q2 2026 following double-digit growth in Q1, with strong demand across the Americas, Africa and global regions. For data centers, Franklin serves multiple parts of the facility water loop and has an agile global supply chain to serve CDU manufacturers; no major wins are ready to be announced, but more specific details will be shared in the second half of 2026.

• Q: What is driving 12% growth in U.S. agricultural water systems despite broad ag sector headwinds, and is strong mining dewatering growth likely to spread beyond Australia?

  A: Agricultural growth is driven by pent-up demand after a year of underinvestment amid commodity price volatility, favorable drought conditions that increased urgent replacement demand, and the business' 75%+ replacement focus paired with strong on-hand inventory availability that allows the company to meet immediate customer needs. For mining, strong growth is already spreading beyond Australia to the U.S. (copper, nickel, lithium, uranium) and Europe, driven by massive projected growth in global critical minerals demand over the next decade; the company's focus on existing mine expansion and dewatering/maintenance positions it well to capture this growth, and recent acquisitions and brand consolidation are increasing market awareness of Franklin's offerings.

• Q: What are the key puts and takes that inform the second half 2026 guidance, which implies moderated earnings compared to the first half?

  A: Core market momentum and healthy order/backlog trends remain strong, matching the positive first half performance. The moderation reflects cautious modeling for three key unknowns: new recently announced tariffs that create input cost uncertainty, ongoing political and policy volatility in Brazil (a key ag market for the company) that has slowed demand in 2026, and the ongoing Middle East conflict that is dampening activity across the broader EMEA region. The guidance balance reflects these unknowns rather than a shift in core underlying business momentum or market share performance.

• Q: What margin initiatives is management currently prioritizing?

  A: The top priority is completing ongoing operational consolidations and new factory ramp-ups; restructuring costs for these projects are already baked into current results and guidance, with efficiency gains expected to accrue starting next year. Second, the newly reorganized supply chain team is continuing to capture productivity benefits from supply chain repositioning away from over-reliance on Chinese suppliers. Third, the company is rolling out AI tools to boost operational and back-office productivity, while also accelerating onboarding for new talent to sustain long-term improvement.